Unusual items – who needs them?

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Peter Malmqvist

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The definition of an ‘unusual item’ is a nonrecurring or one-time gain or loss which is not considered part of normal business operations.

But can this definition be applied in the context of Covid-19 and, if so, is it a fair representation?

The second quarter earnings results in the apparel company H&M were a disaster. Going from a profit of nine billion Swedish kronor a year ago to a loss of the similar size was unprecedented. Since the listing of H&M in 1974, profit declines have been rare, and losses never heard of.

It was the Covid-19 effect that struck. Forced by the governments in most of Europe to close down its stores, the company’s dominant source of income during the second quarter was from the internet, which made up approximately 15 percent of sales, and its Asian business. Those sources did not help much: sales overall declined by 50 percent, dragging down gross profit by 12 billion kronor year on year.

Everybody can agree that the second quarter was an unusual period in the company’s life, even extraordinary. We can probably also agree that the effect from lock-downs is impossible to bundle into one number labelled “unusual” items. Indeed, the line “unusual items” is not helpful in either the income statement, the notes or the management report.

However, the Covid-19 effect would probably qualify as unusual in most definitions in accounting literature. The world has not faced a pandemic of similar size since 1968 when the Hong Kong flu struck. Neither has anyone faced the problems stemming from politicians locking down countries, preventing citizens from doing what they do best – consume. This is  a truly a once in a lifetime event. From a financial reporting perspective, the key issue at the moment is: Do we want unusual effects bundled together and labelled “unusual”? That is what the IASB is aiming at.

Most users of accounts would probably say “no”. We want information. We need answers to multiple questions, like how much were sales affected by Covid-19? What was the effect on gross profit? What was the most likely rent relief from landlords? What was the size of the government wage subsidy? A single line labelled “unusual items” does not help understand these consequences. 

Those who believe in one-liners would probably defend a definition of ‘unusual’ as being helpful. Many investors I have met have frequently demanded a line in the profit and loss statement telling us what operating earnings are before unusual items. That seems to be the holy grail for equity analysis – to find core earnings, the strong, undisputed trend in the company’s dividend capacity, so cherished and so elusive.

The truth is that businesses are messy, and so are the accounts. Acquisitions, restructurings, litigation, currency fluctuations, changing business cycles, derivative value fluctuations, prices going up and down, penalties incurred and the list just keeps going on. All of these create a profit analysis worthy of the clever Hercules Poirot. It is a jigsaw puzzle with constantly changing pieces.

In my research between 1997 to 2017 for Nasdaq Stockholm (formerly the Stockholm Stock Exchange) the average amount of unusual items was equal to 15 percent of earnings before tax, with a marked “back load”: out of that 15 percent, seven percentage points were presented in the fourth quarter. Only 2 percentage points were present in the first. 


The most frequent unusual item was “restructurings” and the like. In 44 percent of companies this item showed up. These restructurings included the closing down of factories, logistics centres, offices and stores. It occurred more frequently in companies involved in many acquisitions and happened more in companies with new CEOs. Most managers bundled the cost into a provision, normally in the fourth quarter of the financial year.  

The restructuring costs were also more substantial and more frequent in the years with a downturn in the business cycle than they were during upturns. At the bottom of the business cycle in 2003, 2008 and 2012 the amounts were three times as high, compared to the peak of the same cycle some years before. However, this is not surprising given that restructuring expenses often are employee related and headcount becomes more of an issue in downturns.

Gains from restructurings are rare and happened more if a company simultaneously presented discontinued operations. From 2005, when IFRS was introduced in Sweden, on average 13 percent of companies presented this line item. Normally the numbers were small, implying that the accounting too often is used for insignificant divestments. Personally, I do not find this accounting helpful on business units that are smaller than a separately presented segment.

The second most frequent unusual item I found was write-downs, showing up in 20 percent of the companies. Write downs of  goodwill, of course, were common but impairments of other intangibles related to acquisitions were also frequent, as well as write-down of accumulated product development expenses. Impairments of plant, equipment and inventory also occurred, but not as frequently.

There was no obvious third candidate of unusual items, but legal costs were quite common, particularly for companies doing business in the U.S. The costs were both for the legal process and for the final settlement. Costs for a temporary closing down of factories for maintenance occurred, and in some smaller companies, there were costs for relocating the business to new premises. Fires and other catastrophes happened and a year later very often higher insurance pay-outs showed up. 

Currency effects were very common but were seldom presented as “unusual”. The information varied a lot and the effects showed up in multiple places: in working capital (included in the operating earnings), in net debt (financial items) and as hedging (OCI/operating earnings). The high volatility in the Swedish krona, as well as large foreign currency exposures in most companies, makes this a very important topic. However, translation adjustments on foreign operations (presented in OCI) are not commented on even though I observed that sometimes the effects were equal in amount to the company’s net earnings.    

Information about unusual items was, in the vast majority of cases, included in the MD&A, both in the quarterly and the annual reports. In the latter, disclosure in the notes was common. However, footnotes in quarterly reports have become more common in the last 2-3 years, particularly in companies with multiple unusual items. This follows a statement from the IASB some years ago, setting out the need for more detailed footnotes in interim reports.

It was rare that Swedish companies would bundle items together and present them on the face of the income statement. If it happened the company usually included a label indicating “items affecting comparability” and separated them into the different functions in a footnote. However, in the MD&A companies frequently presented an aggregated adjusted earnings figure. It can be quite time consuming to flip back and forth in a 50-page quarterly report to find the adjustments made to arrive at that figure. The ESMA guidelines on reconciling to the nearest IFRS figure have not really helped in this area.

I am strongly in favour of forcing companies to start the presentation of quarterly and annual results using an IFRS number. Whether the number is net, before tax or (in the future) operating is less important. It is the clear connection to the P&L that matters. This would incentivise companies to present adjustments directly in connection to the result.

So, in conclusion and to try to address the question I posed at the outset: Do we need a definition of “unusual items”? Not really. Do we need information about “unusual items”? Very much so and we should not limit the company’s possibilities to use its own explanations. However, companies have to make sure the information is presented in a concise way, particularly in the quarterly reports where non-recurring items are a much bigger issue than in the annual accounts.  Let’s hope the IASB’s consultation looks to address these concerns.  

Peter Malmqvist has been an equity analyst at numerous financial institutions in Sweden, as well as a business journalist. Presently, he writes for several investor magazines and works for the Swedish accounting enforcement organisation. He teaches accounting and company valuation at the Stockholm School of Economics and has been a member of the Capital Markets Advisory Committee at the IASB and is also a member of the EFRAG User Panel. Peter is also a CRUF participant since 2015. 

Disclaimer: The views expressed in the blog are those of the author and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the comment letters section of the CRUF website.

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